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StanChart: Has UAE given up a great opportunity?

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Matein Khalid

If banks were people, Standard Chartered Bank (SCB) would be a plain Jane spinster, always a bridesmaid but never a bride, jilted at the altar by her suitors and now at the nikah by First Abu Dhabi Bank. I had a near heart attack when I saw the shares rise 20% in London as the grapevine said a major Abu Dhabi bank was going to bid for SCB but I also knew that ANZ, Barclays, J.P. Morgan, Santander and Scotiabank had done the due diligence on StanC but it never passed their sniff test despite its joke valuation, even now a mere 0.6X tangible book value. Now Abu Dhabi’s flagship bank walked away from a bid at the last minute. Why? Hana, Hana wherefore art thou?

I have only traded in SCB for short pops as its history in the last three decades, which coincides with my own adult life, is horrifying. SCB was global banking’s biggest victim of Desiscam after BCCI in 1993 when executives in its Mumbai branch diverted customer deposits to the stock market manipulation scheme engineered by Harshad “Big Bull” Mehta, Dalal Street’s arch criminal who died in jail but cost the bank £350 million in losses, a third of its then capital base. It is not as if the bank has no experience in India since it was founded in Bombay and Calcutta in 1853 on a charter granted by Queen Victoria four years before the Sepoy Mutiny when India’s head of state was the poet Mughal Emperor Zafar. Yet the bank seems not to have learnt any lessons from its 170 year colonial pedigree. The bank was just fined by the RBI for FX manipulation in its acquisition of Tamilnad Merc Bank. There were also major scandals related to its Mocatta Metal business and IPO underwriting in Hong Kong that gutted its plans to build an Asian investment bank. These fines and losses were chump change compared to the $340 million the bank paid after it was sanctioned for processing more than $250 billion for Iranian state clients.

In April 2019, SCB was also fined by the US Treasury and UK regulators for violating AML protocols and sanctions against Myanmar, Zimbabwe, Cuba, Sudan, Syria, and Iran. I decided I could not own SCB shares and sleep at night even though now its largest shareholder is Singapore Government Bank DBS with a 16% stake. So why does Piyush Gupta not want to buy SCB? I have now changed my mind on SCB shares, why?

One, CEO Bill Winters, a fellow Wharton and JP. Morgan Chase alum has cleaned up all the mess the old Britsahibs (Sir Johnny Joker muddle through and Lord Haw Haw) and McKinsey consultants left behind. The bank took huge losses in dodgy loans to diamond merchants and was gutted by its exposure to South Korean, Indonesian and Indian conglomerates with heavy duty political connections (sounds familiar?) and paid 5X book value for a Pakistani bank in the Musharraf era just before a financial meltdown. The result, a succession of profit warnings, missed earnings and a $5 billion in capital raise in 2015. SCB was banking cryptonite for me but no more.

Two, China’s reopening is hugely bullish for SCB’s Hong Kong business, its biggest market that contributes 22% to its bottom line.

Three, the swift rise in US and British interest rate is nirvana for a bank whose interest rate income soared 20% in Q3 and will enable a 10% ROE in 2023.

Four, the plunge in the British pound makes SCB hugely valuable to a USD based buyer like a Gulf sovereign wealth fund (PIF or QIA) that wants to project its soft power across Asia, Africa and the Middle East where the bank derives 90% of its profits. Manju and I love to visit our friends in SCB’s London HQ because the lobby looked like a Buddhist temple in Thailand.

Five, SCB trades at 10X earnings and its valuation is only $23 billion, almost one third the val of First Abu Dhabi Bank or even DBS. Imagine if Bill Winters can slash its bloated cost/income ratio from 65% now to 50%? The shares could double. But will he or can he since SCB reports to 59 different regulators? I doubt it.

Six, Stan Chart is the ultimate trade finance bank and has valuable franchises in Dubai, Shanghai, Hong Kong, Singapore, Nairobi, Joburg and Mumbai that could well become East-West trade hubs but also have the risk of protectionist legislation and sanctions violations.

Seven, the biggest risk is the geopolitical risk between Uncle Sam and China’s Uncle Xi Dada for obvious reasons.

Eight, Stanchart may be worth peanuts on the stock exchange but it has $864 billion in assets and is a top 10 US dollar clearing bank, making it too big to fail.

So why did First Abu Dhabi Bank give up the chance to create the UAE and Gulf’s first trillion dollar asset bank, I always remember a very wise sheikh who once told me that his biggest regret in finance is that he did not assemble a GCC consortium to buy the British Bank of the Middle East (BBME), which was the de facto commercial bank of the Trucial States before the birth of the UAE Federation in December 1971. Could SCB be the second and last chance for the Gulf Arabs to own a global emerging markets bank? The BBME of our generation? The answer lies not in balance sheets or even bank boardrooms but in the inner sanctums of the West’s diplomatic chancelleries. That much, at least, is certain. For now, I want to use options strategies to go long SCB at 640 pence on the LSE.

Also published on Medium.

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